Sweeping bank reform moves in for final vote next week

RonaldD. Orol

WASHINGTON (MarketWatch) -- Even with dozens of measures yet to be voted upon, the light is visible at the end of the tunnel for sweeping bank reform legislation in the Senate.

Lawmakers are not scheduled to vote upon additional bank reform measures until Monday evening. However, the Senate has made progress so far by voting upon over thirty amendments, including four major provisions on Thursday.

Responding to federal and state investigations into conflicts of interest at financial institutions and credit-rating agencies, Senators approved a measure Thursday to create a government-appointed board to assign credit raters for banks' structured finance securities.

Lawmakers also approved a measure directing federal regulators to impose tough risk and size-based capital standards for big financial institutions. The measures were attached to a sweeping bank reform bill.

Sen. Christopher Dodd, D-Conn., said he hopes to complete work on the legislation by Wednesday. However, the timing of the final vote is likely to slip.

Lawmakers could get bogged down with amendments and Republicans could delay action on the bill. It's also unclear whether Democrats have the filibuster-proof 60 votes needed for passage, even though a handful of moderate Republicans have backed Democrat measures imposing stringent restrictions on banks and credit rating agencies. Read about new tough credit card rules.

Still on the agenda are a series of big votes. Lawmakers are expected to vote on a measure that would strip a controversial provision intended to have big commercial banks - or investment banks with commercial units -- divest their derivatives divisions.

The timing of the vote on this measure could be influenced by the re-election campaign of its author -- Sen. Blanche Lincoln, D-Ark. Lincoln is facing a heated primary race on Tuesday in Arkansas. Speculation is that the provision will be defeated or ultimately removed from the bill, but that Lincoln's Democrat colleagues will delay action on her measure until after the primary to enable the lawmaker to argue that Democrats are tough on Wall Street.

Lawmakers are also scheduled to vote on Monday on a controversial provision introduced by Sen. Arlen Specter, D-Penn., which would let investors file lawsuits against law firms and accounting firms for aiding and abetting fraud, a major change that would open the floodgates to much more private civil litigation.

The Pennsylvania Democrat introduced the legislation, in part, after a bankruptcy examiner for Lehman Brothers found evidence of possible malpractice in Ernst & Young LLP's auditing of the mega-bank prior to its collapse. Lehman's failure is considered central to the financial crisis and the credit crunch that took place after its failure.

However, Republicans argue that the provision could expose thousands of smaller business, such as accounting firms, tax preparers and law firms, to unfounded accusations of fraud, opening them up to the professional costs of discovery and trial.

"Trial lawyers are going to have a field day with this," said Sen. Mike Enzi, R-Wyo. "The standard requires actual knowledge of violation."

Also on the agenda, is a measure that would strengthen a measure based on the so-called Volcker Rule, a provision named after former Fed Chairman Paul Volcker who chairs President Barack Obama's economic advisory panel.

The measure, introduced by Sen. Carl Levin, D-Mich. would seek to prohibit big banks from making speculative investments in stocks, bonds and derivatives. It would also force big banks to sell hedge funds and private equity divisions. The provision also seeks to prohibit investment banks from packaging mortgage securities, selling them, and then betting against them.

The measure would be a significant expansion upon the underlying bank reform legislation, which instructs bank regulators to study the Volcker rule and require regulators to follow the recommendations made by the report. Levin introduced the measure after completing an 18-month investigation into conflicts of interest between investment banks and credit rating agencies.

In addition the Senate is scheduled to vote on a wide-variety of consumer-focused measures, including one introduced by Sen. Sam Brownback, R-Kansas, which would seek to exempt auto dealers that provide financing from a proposed Consumer Financial Protection Bureau. Read about consumer protections.

Another controversial measure that would ensure broker-dealers are held to a fiduciary standard when giving personalized investment advice to retail customers will also be considered Monday or later in the week.

The measure, introduced by Sen. Richard Durbin, D-Ill., could raise compliance costs and hike the specter of litigation against broker-dealers. But it would also match a provision already in the bill that subjects swaps dealers at investment banks with a fiduciary duty when they sell derivatives to pension funds.

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